YES Bank ATI-1 bonds case: SEBI imposes Rs 2 crore penalty on Rana Kapoor.

SEBI fines Rana Kapoor Rs 2 crore in the Yes Bank AT-1 bonds case, citing the more significant number of clients…

Rana Kapoor, the former managing director and chief executive officer of Yes Bank, has been fined Rs 2 crore by the Securities and Exchange Board of India (SEBI) for misselling additional tier-1 bonds (AT-1 bonds). In addition, he was held accountable by the SEBI order for the deceptive marketing of the Yes Bank AT-1 bonds. The regulator stated that Mr. Kapoor must make the payment within 45 days. The SEBI Act’s Section 15HA guidelines were used to pass the order.

The case relates to Yes Bank executives allegedly offering AT-1 bonds as super FDs (fixed deposits) to investors while promising higher returns and the security of a standard bank FD.

The entire secondary sale of these AT-1 bonds was overseen by Mr. Kapoor, who was in charge of the operation. He received regular updates from the team and gave them additional instructions to speed up/increase sales, which put pressure on the officials to increase sales. Thus, the regulator determined that he was in charge of manipulating and deceiving individual investors by misrepresenting/suppressing material facts and selling AT-1 bonds. Moreover, according to the SEBI order, he “pressured officials to devise cunning plans to dump the AT-1 bonds on helpless Yes Bank customers.”

Sebi imposes Rs 2 cr fine on Rana Kapoor in Yes Bank AT-1 bonds case- The New Indian Express

Investors in the AT-1 bonds issued by Yes Bank had filed several complaints with SEBI. As a result, it investigated and discovered that between December 1 2016, and February 29 2020, retail investors purchased Yes Bank AT-1 bonds. The main goal of the inspection was to verify whether YBL officials missold the AT-1 bonds that were initially issued to institutional investors to retail investors and whether the institutional investors who sold the AT-1 bonds to retail investors through YBL violated the provisions of the SEBI Regulations, 2003 ( referred to as “SEBI Regulations”).

Vivek Kanwar, who is the head of the private wealth management (PWM) team, Ashish Nasa, and Jasjit Singh Banga, who were members of the PWM Team at the relevant time, were observed by SEBI during the investigation to have facilitated (designed the process) the reselling of AT-1 Bonds of YBL to individual investigators to institutional investigators. However, between 2004 and January 31, 2019, SEBI found that the individual investors were not adequately informed about all the risks associated with the subscription of AT-1 bonds during the reselling of AT-1 bonds. 

Therefore, it was falsely said that the AT-1 Bonds were mis-sold to individual investors. As a result, the YBL and its officials, including Rana Kapoor, violated the SEBI Act’s and PFUTP regulations’ provisions.

Yes Bank scam — Rana Kapoor and family named in CBI charge sheet alongside DHFL's Wadhwan brothers | Business Insider India

SEBI noted that 679 crore rupees had been invested in the AT-1 bonds by 1,346 individual investors. One thousand three hundred eleven of the total investors, who put about Rs 663 crore into these AT-1 bonds, were already Yes Bank customers.

Up to 277 customers who already had FDs with Yes Bank prematurely closed them and invested about Rs 80 crore in these AT-1 bonds, which were later written down.

SEBI noted that Yes Bank had also neglected to conduct risk profiling of specific clients, particularly older people in their 70s, 80s, and 90s. It also added that there was a push from the chief executive officer (CEO) of the Bank to down-sell AT-1 bonds, which led the private wealth management team to sell the bonds to individual investors recklessly.

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“Given the significant impact on investors and the volume of sales made possible by this scheme, I think that this act by Notice merits a penalty commensurate with the seriousness of the violation and would be a deterrent, “The adjudicating officer, Soma Majumder, stated in the order.

The Yes Bank incident resulted in the entire value of the Bank’s AT-1 bonds (Rs8,415 crore) being written off when the rescue package led by the State Bank of India (SBI) was announced in March 2020, casting a long shadow over AT-1 bonds. As a result, investors in these bonds lost all of their money. In addition, it was falsely claimed by several distributors and agents that these bonds were “better than fixed deposits.” The improper sale of these instruments had prompted hundreds of complaints from retail investors.

It may be recalled that institutional investors, including mutual funds like Reliance Nippon, and private investors invested up to Rs. 8,415 crores in Yes Bank’s perpetual AT-1 bonds, which have no set maturity date. Investors lost money when these securities were written down to zero in March 2020 as part of a restructuring plan for the bankrupt lender that the government approved. 

The AT-1 bondholders have filed lawsuits in several courts claiming that the Bank owes them money because these securities were improperly sold to them. The Bombay High Court is still hearing the case. However, the AT-1 bond write-off has been defended by Yes Bank and banking regulator Reserve Bank of India (RBI) as complying with Basel III rules.

Reliance Nippon Life Asset Management was the company with the highest exposure to Yes Bank’s AT-1 bond. According to news reports, the Anil Ambani-led group borrowed money from Yes Bank for more than Rs12,000 crore. In addition, reliance Infrastructure had paid Yes Bank Rs 1,200 crore in April 2021 to purchase its headquarters in Santacruz, Mumbai.

To prevent retail investors from purchasing new bank-issued AT-1 bonds, regulations were tightened in October 2020. The new regulations shield small-scale investors from purchasing these extremely risky securities.

SEBI imposes a 25 crore penalty on Yes-Bank. But Why?

The SEBI fined Yes Bank Ltd. Rs. 25 crores for defrauding its clients by persuading them to switch their investment positions from safe additional tier-1 (AT-1) bonds to fixed deposits (FDs). Additionally, SEBI fined three former senior executives of Yes Bank who worked in the private wealth management division between Rs. 50 lakh and Rs. 1 crore.

Sebi penalizes Yes Bank in bonds case | Mint

According to SEBI’s investigation, Yes Bank misrepresented the AT-1 bond product as a “Super FD” and “as safe as an FD,” among other things. Additionally, not many investors were given access to the term sheet, and no confirmation was sought from the clients regarding their comprehension of the characteristics of the product and the bond’s risks.

As a business, Yes Bank acted through its employees, according to the SEBI order by adjudicating officer Soma Majumder, to “perform such fraudulent acts on its hapless and unsuspecting customers, some of whom were even persuaded to even alter their investment positions from FDs to these risky AT-1 bonds.

The head of private wealth management, Vivek Kanwar, as well as Ashish Nasa, and Jasjit Singh Banga each received fines of Rs. 1 crore and Rs. 50 lakh, respectively, from the market regulator.

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According to the SEBI order, the Bank’s own customers were the victims of misrepresentation and fraud when they were persuaded to purchase risky AT-1 bonds. As a result, a penalty of Rs. 25 crores was imposed. Even some of these clients were persuaded to switch from FDs to these AT-1 bonds. According to SEBI, the punishment is appropriate given the offences and will serve as a deterrent.

Investors in the AT-1 bonds issued by Yes Bank had filed a number of complaints with SEBI. It carried out an investigation and discovered that between December 1 2016, and February 29 2020, retail investors purchased Yes Bank AT-1 bonds.

SEBI noted that 679 crore rupees had been invested in the AT-1 bonds by 1,346 individual investors. Out of the total investors, 1,311 were already Yes Bank customers who bought these AT1 bonds for about Rs 663 crore. Up to 277 customers who already had FDs with Yes Bank prematurely closed them and invested about Rs 80 crore in these AT-1 bonds, which were later written down.

SEBI noted that Yes Bank had also neglected to conduct risk profiling of specific clients, particularly elderly people in their 70s, 80s, and 90s. Furthermore, the private wealth management team sold the AT-1 bonds to individual investors carelessly as a result of pressure from the Bank’s CEO to reduce their price.

According to the order, the facts and circumstances of the case clearly show that the employees came up with the plan to sell the institutional investors’ AT-1 bonds to individual investors, including their clients, in order to persuade them to contribute more capital to Yes Bank.

“SEBI found that the notices had made it easier for institutional investors to sell Yes Bank AT-1 bonds to individual investors. It was claimed that individual investors were not made aware of all the risks associated with purchasing AT-1 bonds during the bond sale process.

SEBI Restricts Retail Investors from Investing in Fresh AT1 Bond Issues of Banks

In an attempt to do that, the Bank highlighted the AT-1 bonds as earning high interest vis-a-vis the FDs. The Bank’s failure to provide investors and customers with pertinent documentary information suggests that important information was withheld in order to give the AT-1 bonds a deceptive appearance and entice people to buy them.

Investors and customers of Yes Bank were duped into buying the bonds as a result of the Bank’s and its employees’ false representations. A few of the customers also closed their FDs and bought AT-1 bonds with the proceeds. According to the SEBI, all of these actions constitute fraud committed by the Bank against the investors.

The former executives argued that they were neither key decision-makers nor members of management. They also claimed that Rana Kapoor, who was Yes Bank’s then-MD and CEO and in charge of all activities, including decision-making, came up with the idea and made the decision to facilitate the sale of AT-1 bonds to retail investors.

Under the auspices of the AT1 Bondholders Association, bondholders had petitioned the court in February, alleging that the bond sale had been fraudulent. They also urged the court to order Yes Bank to deposit Rs 160 crore in the court, pending the outcome of the case. Institutional investors like Indiabulls and 63moons Technologies have also filed lawsuits, in addition to retail investors.

RBI, Sebi seek time to file response in Yes Bank AT1 bondholder case | Mint

The RBI and SEBI were given time by the Bombay High Court last month to respond to a petition submitted by individual holders of Yes Bank AT-1 bonds. The next hearing will probably occur on April 26, 2021.

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On March 13 of last year, the government approved a rescue plan for Yes Bank, which included investments of Rs 10,000 crore from SBI, ICICI Bank, HDFC, Kotak Mahindra Bank, Bandhan Bank, Federal Bank, and IDFC First Bank. Following a reconstruction plan created by RBI with the help of the finance ministry, the bailout was implemented. Yes Bank wrote off Rs 8,415 crore worth of AT-1 bonds in accordance with the parameters of the Bank’s reconstruction scheme.

It’s interesting to note that while the RBI (the banking regulator responsible for safeguarding the interests of customers) and Yes Bank rejected the allegations of misselling in the case, SEBI fined the Bank and its former employees.

While the order unequivocally supports and confirms the charge that Yes Bank executives misled retail investors by misrepresenting perpetual bonds, it is unsettling to note that the RBI is still remaining silent about the egregious misrepresentation of AT-1 bonds that occurred in the Yes Bank case. The SEBI order effectively refutes RBI’s assertion that the petitioners’ claims lack merit.

In fact, the banking regulator stated in its response to the petition filed by 63 Moons Technologies in the Madras High Court last year that the action for writing off the bonds were properly taken in accordance with the terms of the agreement between Yes Bank and AT-1 bondholders, and as a result, the petitioners’ claims are without merit.

“The whole purpose of writing off the bonds is to ensure that the capital infused by the public sector, i.e., SBI and other investors, should not be diluted,” the RBI had stated. Since the AT-1 bonds are a liability, they should be written off in order to effectively implement the Notified Scheme, which is designed to serve the interests of the public and win back depositor confidence.

The SEBI order is reportedly being appealed by Yes Bank, and the unfortunate investors may be in for a protracted legal battle.

What is SEBI?

The Securities and Exchange Board of India (SEBI), which is owned by the Indian government’s ministry of finance, oversees the country’s securities and commodity markets. It was established on 12 April 1988 as an executive body, and on 30 January 1992, the SEBI Act 1992 granted it statutory authority.

Securities Exchange Board of India (SEBI) | Role and Structure of SEBI

In order to control the securities market, the Securities and Exchange Board of India (SEBI) was first established as a non-statutory body in 1988. With the passage of the SEBI Act 1992 by the Indian Parliament, it was given statutory powers and became an independent body on January 30, 1992. SEBI is headquartered in Mumbai’s Bandra Kurla Complex, and it also has regional offices in New Delhi, Kolkata, Chennai, and Ahmedabad for its northern, eastern, southern, and western regions. In the 2013–2014 fiscal year, it established local offices in Jaipur, Bangalore, Guwahati, Bhubaneshwar, Patna, Kochi, and Chandigarh.

Prior to the creation of SEBI, the regulatory body was the Controller of Capital Issues, which received its authority from the 1947 Capital Issues (Control) Act.

Members of the SEBI, which includes the following, manage it:

  • The chairman is nominated by the Union Government of India.
  • Two officers from the Union Finance Ministry, i.e., members.
  • A single Reserve Bank of India representative.
  • The Union Government of India proposes the other five members; at least three of them must be full-time representatives.

Except for nidhis, chit funds, and cooperatives, collective investment schemes were brought under SEBI after the amendment of 1999.

edited and proofread by nikita sharma

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